CHAPTER 9
MARKET ENTRY AND EXPANSION
Chapter Outline
A. Stimuli to Internationalize
1. Proactive Stimuli
2. Reactive Stimuli
B. Change Agents
1. Internal Change Agents
2. External Change Agents
C. Going International
1. Export
2. Export Management Companies
3. Trading Companies
4. E-Commerce
D. Licensing and Franchising
1. Licensing
2. Franchising
E. Foreign Direct Investment
1. Major Foreign Investors
2. Reasons for Foreign Direct Investment
3. A Perspective on Foreign Direct Investors
4. Types of Ownership
Chapter Objectives
This chapter discusses the beginning international effort of firms with a primary focus on
exporting, licensing and franchising. It highlights the motivations of management to go
abroad, separating those into proactive (i.e. self-initiated) and reactive motivations. The
concept of change agents is introduced, and it is explained that major concerns and problem
areas vary for firms as they enter the international market. The chapter then discusses the
internationalization process which, similar to the decision adoption framework, highlights
the gradual movement of firms through international stages.
The risks and benefits of licensing are explained, with major emphasis on the structure of
licensing agreements. Such agreements need to take the time frame, renewal, royalty rate,
and the confidentiality of information into account.
The explosive growth of franchising is subsequently highlighted, together with the problems
firms encounter in obtaining high levels of standardization in the international market.
Under the subheading of export intermediaries export management companies and export
trading companies are discussed. Export management companies (EMCs) specialize
primarily as either full-fledged intermediaries who take title to goods or as agents. Export
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trading companies (ETCs) in turn are also exempt from antitrust legislation and are a U.S.
emulation of the successful Japanese and Korean trading companies. So far, this latter
mechanism has not been very successful since both U.S. firms and bankers are wary of the
cooperative concept. It is important to remind students that while export intermediaries can
and will perform international marketing functions for the firm, this performance is not
without its cost. Firms using these intermediaries will therefore achieve lower profit
margins and run the risk of not obtaining sufficient information about the international
market in order to prepare themselves for subsequent internationalization.
Foreign direct investment activities and management contracts are also discussed in this
chapter. Marketing factors and market access issues are the major causes for investment.
Governments increasingly support such investment through incentives, since it provides
capital and employment.
Two principal forms of foreign direct investment are full ownership and joint ventures. Full
ownership may be desirable from a control perspective, yet often runs into problems with
governments. Joint venture activities are frequently necessary in order to comply with
government regulations. However, such activities are also valuable in terms of lower capital
commitments and the ability to learn from each other. Nevertheless, the problems of
cooperation, profit distribution, and management philosophy may become obstacles to joint
venture success.
Strategic alliances, or partnerships, are a special form of joint venture in which the
participants, at either the industry or the corporate level, join forces in order to make major
progress toward technology development and competitiveness. Given the complexities and
cost of technological progress, the number of these alliances, sometimes encouraged through
government-sponsored consortia, is rapidly increasing.
Management contracts offer a firm the possibility to participate in international projects
without taking equity ownership. Specialized expertise is useful for the investor as well as
for the firm which wishes to sell this accumulated expertise.
Suggestions for Teaching
A good starting point in class is to ask students why a firm goes abroad. Surprisingly often,
the profit motive only emerges after some time. It is very useful to ask students then how
firms can evaluate international profitability before having entered the international market.
Doing so highlights the difference between perception and reality, a crucial difference often
emerging painfully for firms only after some international experience.
In the context of future student careers, it is also useful to highlight the management
differences between proactive and reactive firms. International success for the individual is
likely to come quicker in a proactive firm, and students looking for international
advancement should look towards such firms.
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When discussing the usefulness or helpfulness of external agents to the internationalization
process, it is valuable to spend some time focusing the discussion on what is expected of
different external agents, and what their comparative advantage is in delivering on all of
these expectations. If sufficient class time is available it may be also of use to focus on the
appropriate/inappropriate role of government in export promotion. In this context it is also
helpful to clearly interlink the model of the export development process with the concerns of
firms in the different international stages. Students need to understand that these concerns
change over time and are the result of the experience, the perception, and the information
available to management.
For both the topics of franchising and licensing it is useful to pick several business activities
and present them to the class and suggest their internationalization. Taken together with
foreign market restrictions and different consumer needs abroad, students will quickly
recognize barriers to international expansion. Once this recognition has occurred, it should
be counterbalanced by demonstrating the successful licensing and franchising operations
which exist (e.g., McDonald's, Coca-Cola) and by guiding the students in their discussion to
understand the factors which have made these organizations such a success and have ensured
their longer-term survival (e.g., economies of scale, thorough understanding of customers,
proprietary technology).
In discussing export intermediaries, students need to fully understand the difference between
an intermediary which takes title to goods vs. an agent. It is helpful to explain the financial
implications of these two kinds of activities. Similarly, the benefits of shared expenses can
be highlighted, particularly if one allocates cost of a specific activity (such as warehousing)
among ten different firms. If the instructor or some international students in the class have
experience with large export trading companies, it is useful to spend some time
differentiating these firms and their cultural and historical background from U.S. export
trading companies.
It is useful to start out the discussion of foreign direct investment by focusing on the
economic effects. Students may wish to think through what it means if money comes into an
economy for foreign direct investment purposes. This can be highlighted by contrasting the
investment into an existing firm with greenfield investment. Useful in this context is also
discussion of national security, where the attention of students can be directed toward
corporate or government efforts from abroad to purchase, for example, an entire industry.
The issue of ownership can then be discussed with a special focus on the need for control. A
step-wise approach has been helpful to us here, focusing on the different marketing
functions, then exploring with the students different corporate activities which are sensitive
to control. What should be continuously stressed is the fact that, initially at least, in a joint
venture, all partners have a great interest in making the venture a great success. However,
the definition of success may vary from partner to partner.
The issue of management contracts can be particularly well covered from a service
perspective. If students understand that many economies are increasingly becoming service
based, they will also develop a greater appreciation for the fact that this service knowledge
ought to be transformed into something internationally salable.
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Key Terms
Safety-valve activity: Stimulating export sales with short term price cuts in order to balance
inventories or compensate for overproduction in the short term.
Psychological distance: The lack of symmetry between growing international markets
with respect to cultural variables, legal factors, and other societal norms; a market that is
geographically close may seem to be psychologically distant.
Change agent: The introduction into a culture of new products or ideas or practices, which may
lead to change in consumption. The intervening individual or variable who initiates a change in
the firm and monitors it through to implementation.
Accidental exporters: Firms which become international unexpectedly due to unsolicited orders,
such as those placed via a Web site, requiring export; unplanned participation in the international
market.
Born global: Firms which are founded for the explicit purpose of marketing abroad since the
domestic economy is too small to support their activities.
Innate exporters: Exporting firms which embark on their export activities within two years of
establishment.
Adaptation: An experienced export firm which is able to adjust its activities to keep pace with
changing exchange rates, tariffs, and other variables in the international market.
Sogoshosha: Large Japanese trading companies, such as Sumitomo, Mitsubishi, Mutsui, and C.
Itoh.
Export trading company (ETC): Legal construct designed to encourage small and medium-
sized companies that are encouraged to participate in the international marketplace; aimed to
reduce the antitrust threat to joint export efforts.
E-commerce: The ability to offer goods and services over the Web.
Licensing: An agreement where one firm, the licensor, permits another to use its intellectual
property in exchange for compensation designated as a royalty.
Transfer costs: All variable costs incurred in transferring technology to a licensee and all
ongoing costs of maintaining the agreement.
R&D costs: Costs incurred on account of research and development of licensed technology.
Opportunity costs: Costs resulting from the foreclosure of other sources of profit, such as
exports or direct investment; for example, when licensing eliminates options.
Trademark licensing: Permission for using the name or logo of a designer; literary character;
sports team; or movie star on merchandise such as clothing.
Franchising: A parent company (the franchiser) grants another, independent entity (the
franchisee) the right to do business in a specified manner.
Master franchising system: A system wherein foreign partners are selected and awarded the
franchising rights to territory in which they, in turn, can subfranchise.
Foreign direct investment: Capital fund flow from abroad; company held by noncitizens;
foreign ownership is typically undertaken for long-term participation in an economic activity;
international investment flows that acquire properties and plants.
Portfolio investment: The acquisition of stocks and funds internationally.
Resources seekers: Firms that search either natural resources or human resources in their foreign
direct investment strategy.
Market seekers: Firms that search for better opportunities for entry and expansions in their
foreign direct investment strategy.
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Efficiency Seekers: Firms that attempt to obtain the most economic sources of production in
their foreign direct investment strategy.
Derived demand: Business opportunities resulting from the move abroad principle established
by customers and suppliers.
Fiscal incentives: Specific tax measures designed by the government to reduce the burden on the
investors and thereby attract foreign investment; usually in the form of special depreciation
allowances, tax credits or rebates, special deductions for capital expenditures, and tax holiday.
Financial incentives: Special funding legislated by government to attract foreign investment, by
providing land and building loans, loan guarantees and wage subsidies.
Nonfinancial incentives: Support such as guaranteed government purchases; special protection
from competition through tariffs; import quotas; and local content requirements designed to
attract foreign investment.
Brain drain: Foreign direct investors attracting the best and brightest employees from a domestic
firm; said to be depriving domestic firms of talent.
Profit repatriation: Transfer of business gains from a local market to another country by foreign
direct investor.
Joint ventures: Collaboration of two or more organizations for more than a transitory period
who share ownership and control over property rights and operations.
Strategic alliances: Cooperative arrangements between two or more companies with a common
business objective.
Complementary strengths: When one firm’s strengths (product, geographic or functional)
complement another firm’s strengths and satisfy a joint objective.
Piggyback: One firm making use of another firm’s strength, rather than joining that firm as
equals.
Management contract: An agreement where the supplier brings together a package of skills that
provide an integrated service to the client without incurring the risk and benefit of ownership.
Research consortia: Joint industry efforts in the research and development of new products to
combat the high costs and risks of innovation; often supported by governments.
Questions for Discussion
1. Discuss the difference between a proactive and a reactive firm.
The difference between a proactive and a reactive firm with respect to international
marketing rests in their motivations to engage in international marketing. A proactive firm
initiates the internationalization process, while a reactive firm does not internationalize
unless it is compelled to do so by external stimuli. Examples of internationalization
motivations for proactive firms include profit advantage, unique products, technological
advantage, exclusive information, managerial urge, tax benefits, and economies of scale.
These motivating factors lead to more successful marketing efforts than reactive
motivations. Reactive motivations include competition, overproduction, declining domestic
sales, excess capacity, saturated domestic markets, and proximity to customers and ports.
Environmental changes cause reactive firms to adjust their activities, whereas internally
planned strategies more often direct proactive firms. Proactive firms therefore tend to
remain in the world marketplace, while reactive firms often withdraw when the
environmental pressure ceases.
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2. Discuss the impact of the Internet and e-commerce in making a firm global.
Many companies increasingly choose to market their products internationally through
e-commerce in a variety of ways. There are a variety of ways in which companies can
market their products over the internet. A corporate Web site offers foreign consumers
means of purchasing goods and services from anywhere in the world. Therefore, the
ability to reach new markets is very feasible and can have a tremendous impact on a
company’s profits. Companies can also enter e-commerce by exporting through a variety
of business-to-consumer and business-to-business forums. For example, consumers and
businesses alike can sell their products on the online auction site eBay
(http://www.ebay.com). The internet has shrunk the world which allows a firm to become
global through the use of e-commerce. However, firms using e-commerce are required to
offer up-to-date information in several different languages in their websites to encourage
more orders from foreign consumers.
3. What is meant by the term “born global”?
The term “born global” refers to a newly founded firm that, from the inception, is
established as an international business. These firms were created
particularly for marketing commodities abroad, their domestic market economy being
too small to support their activities. These firms employ three major methods (export,
licensing and franchising, and foreign direct investments) to enter
new markets.
4. Why might a firm choose to retreat to a domestic focus?
A firm might retreat to a domestic focus for several reasons. This may include proactive
stimuli such as sudden shifts in exchange rates, insufficient market research, or higher than
perceived start up costs. On the other hand, reactive stimuli like stable or declining domestic
sales or over production would exert competitive pressures on a firm. The fear amongst
competing firms of losing domestic market share may result to a retreat to a domestic focus.
However, insufficient preparation may result in a hasty market entry and a quick withdrawal.
5. Explain the difference between franchising, licensing, and foreign direct investment, in terms
of ownership, control, and risk.
Franchising is when a parent company (the franchiser) grants another, an independent entity
(the franchisee) the right to do business in a specific manner. This right can take the form of
selling the franchiser’s products or using its name, production, preparation, and marketing
techniques, or its business approach. A franchisee has ownership over the right to do
business in a specific manner, but must abide by the franchiser’s methods in order to remain
in business. Control ultimately relies in the hands of the franchiser, because they decide on
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all aspects of how their business should be operated. From a franchisee’s perspective, the
franchise is beneficial because it reduces risk by implementing a proven concept. The
franchiser on the other hand gains market expertise and an effective screening mechanism
for new franchises, thereby minimizing costly mistakes
Under a license agreement, one firm, the licensor, permits another to use its intellectual
property in exchange for compensation designated as a royalty. The recipient firm is the
licensee. Ownership remains with the licensor, however the licensor gains only limited
expertise because the licensee will do most international marketing functions. The licensee
has control over the use of intellectual property of the licensor for a predetermined
compensation. Licensing offers a proven concept that reduces the risk of R&D failures, the
cost of designing around the licensor’s patent, or the fear of patent infringement litigation.
However, there is a risk of the licensor creating its own competitor not only in the markets
for which the agreements were made but also in third markets. On the other hand, the
licensee benefits from new developments arising out of licensing cooperation and support.
Licensing is a growing trend globally because of the increase in global protection of
intellectual property rights, which makes companies more willing to transfer proprietary
knowledge internationally.
Direct foreign investment represents international investment flows which acquire properties
and plants. The international marketer makes such investments to create or expand a long-
term interest in an enterprise with some degree of control. Ownership resides in the hands of
the company acquiring the direct foreign investment over all aspects of the company. The
receiver of direct foreign investments controls the investment flows over which properties
and plants to acquire, but without this investment, the receiver would not necessarily have
the appropriate funds to expand internationally. Foreign direct investors hold the risk of not
receiving a return on their investment if the acquisitions of the receiving company squander
their money.
6. From a government standpoint, what kind of investment is most beneficial to a country?
Direct foreign investment is viewed as the most beneficial type of investment from a
government standpoint. A government can increase employment and income levels in the
economy by attracting a sufficiently large amount of direct foreign investment. Moreover,
multinational corporations bring economic vitality in a country, by often paying higher
wages than the average domestically owned firms. For example, Ireland has been promoting
government incentive schemes for foreign direct investments for decades. Increasingly, state
and local governments promote investment by sending out investment missions or opening
offices abroad in order to inform local businesses about the beneficial investment climate at
home.
7. Discuss the benefits and drawbacks of strategic partnerings at the corporate level.
Strategic alliances or partnerships are arrangements between two or more companies with a
common business objective.
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Key benefits:
Share costs and risks inherent in production and development efforts.
Accommodate governmental concerns or regulations.
Provide organizational skills, expertise, and management assistance.
Make use of complementary resources.
Better relationships with local suppliers/unions.
Eligibility for governmental contracts.
More likelihood for cultural acceptance.
More flexibility—can be formed, adjusted, and dissolved rapidly.
Serves more markets with fewer resources.
Key drawbacks:
Sharing of profits
Loss of control
Possibility for strategic disagreements
Internet Exercises
1. What programs does the Export-Import Bank (www.exim.gov) offers that specifically
benefit small businesses trying to export? What benefits can be derived from each?
Three programs offered by the Ex-Im Bank for small businesses are short term export credit
insurance, working capital guarantee, and medium and long terms financing. Loan
guarantees allow small businesses that wouldn’t otherwise qualify for loans to do so.
Insurance policies add protection from loss as well as further help small businesses to
qualify for loans. The export credit insurance provided by this bank helps small businesses to
expand sales and stabilize cash flows, apart from boosting their borrowing power. The
working capital guarantee provides confidence to the lenders to provide short term loans to
small and medium businesses.
2. Use the United Nations Conference on Trade and Development FDI database
(available under the Statistics option at http://www.unctad.org) to research the foreign direct
investment profile of a country or region of your choice.
Foreign direct investment has clearly become a major avenue for international market entry
and expansion. The United Nations Conference on Trade and Development FDI database
site provides information on foreign direct investment for every country. Students may be
asked to research the foreign direct investment profile of a country or region of their choice.
This would help understand what is required to circumvent current barriers to trade and
operate in that country as a domestic firm, unaffected by duties, tariffs, or other import
restrictions.
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